Booz Allen Hamilton, the giant McLean consulting company and government contractor, announced this morning that it will separate its U.S. government and commercial businesses, selling a majority stake in the government business to the Carlyle Group, the District-based private equity behemoth, for $2.54 billion.

Booz Allen is one of the area's largest local employers, with 13,000 employees.

The announcement culminates sixth months of discussions among senior Booz Allen executives about the future of the company. Motivating the split have been growing differences between the government and commercial units over the past few years: They recruit from different places, have different internal structures and serve vastly different clients. Perhaps most importantly, the two units have had diverging business success: The government unit's revenues surged after the post-Sept. 11 boom in government spending. But the commercial side did not grow as fast.

The transaction must meet shareholder and regulatory approvals and is expected to close by the end of the year.

"This separation of our core businesses marks a dynamic new chapter in our history," Ralph W. Shrader, chairman and chief executive of Booz Allen, said in a statement. "For 94 years, Booz Allen has adapted and evolved as market realities have changed and our areas of expertise have grown."

Since the mid-1990s, intelligence outsourcing has increased 38 percent to reach $42 billion in 2005, with an estimate of 60,000 to 70,000 contracting personnel. According to multiple press accounts, more than $34 billion, or 70 percent of the intelligence community’s budget for fiscal year 2007, was spent on private contractors for tasks ranging from intelligence collection to dissemination. Media reports suggest that 60 percent of the Central Intelligence Agency is supported by contractors, and 70 percent of its counterintelligence field activities are as well.

Congress estimated that the government spent on average $126,500 annually to support a full-time intelligence civilian. At least $250,000 is necessary to support a core contractor with overhead fees. Many supporters of outsourcing argued that even though a core contractor costs substantially more than a full-time civilian, the total expenditure to pay for the civilian benefits and retirements far exceeds the short-term cost.

The Pentagon is expected to shut a controversial intelligence office that has drawn fire from lawmakers and civil liberties groups who charge that it was part of an effort by the Defense Department to expand into domestic spying.

The move, government officials say, is part of a broad effort under Defense Secretary Robert M. Gates to review, overhaul and, in some cases, dismantle an intelligence architecture built by his predecessor, Donald H. Rumsfeld.

The intelligence unit, called the Counterintelligence Field Activity office, was created by Mr. Rumsfeld after the Sept. 11, 2001, terrorist attacks as part of an effort to counter the operations of foreign intelligence services and terror groups inside the United States and abroad.

[SNIP]

Some current and former Pentagon officials expressed concern that putting the mission of countering foreign intelligence services under the Defense Intelligence Agency could signal a decline in its priority. But Colonel Ryder, the Pentagon spokesman, said the recommendation to close the counterintelligence office was intended to strengthen counterintelligence operations.

Pentagon officials said that the database that housed information about the war protesters was built to track terrorist threats against domestic military bases and that reports about war protesters were put into it by mistake. Mr. Clapper ordered an end to the database, called Talon, last year.

The disclosure that the Pentagon was collecting information about citizens in the United States prompted memories of its activities decades ago, when the military used electronic surveillance to monitor civilians protesting the Vietnam War. The Pentagon is traditionally barred from conducting domestic intelligence operations.

The counterintelligence office was also brought into the scandal surrounding Representative Randy Cunningham, a California Republican, who resigned from Congress in 2005 after pleading guilty to taking bribes from military contractors. Some of the contracts that Mr. Cunningham channeled to Mitchell J. Wade, a longtime friend, were for programs of the counterintelligence office.

Newly declassified documents released on Tuesday shed more light on another activity coordinated by the Pentagon’s counterintelligence office, issuing letters to banks and credit agencies to obtain financial records in terrorism and espionage investigations.

The Pentagon has issued hundreds of so-called national security letters, which are noncompulsory, as a tool to examine the income of employees suspected of collaborating with a foreign spy service or international terrorist network.

“Red alert: Our national security is being outsourced. The most intriguing secrets of the ‘war on terror’ have nothing to do with al-Qaeda and its fellow travelers. They’re about the mammoth private spying industry that all but runs U.S. intelligence operations today… the private spy industry has succeeded where no foreign government has: It has penetrated the CIA and is running the show.” Those are the opening lines to a recent article in the Washington Post by R.J Hillhouse, a blogger and novelist who closely tracks the privatization of the nation’s intelligence agencies.

According to Hillhouse more than 50 percent of the National Clandestine Service has been outsourced to private firms such as Abraxas, Booz Allen Hamilton, Lockheed Martin and Raytheon. Hillhouse’s article in the Washington Post created a firestorm of controversy within the intelligence community. A week later the Office of the Director of National Intelligence responded defending the use of private contractors.

Now Hillhouse has exposed that the reach of these corporations has extended into the Oval Office. Private companies are now heavily involved in creating the analytical products that underlie the nation’s most important and most sensitive national security document—the President’s Daily Brief. And there appears to be few safeguards from preventing corporations from inserting items favorable to itself or its clients into the President’s Daily Brief in order to influence the country’s national security agenda.

CORRECTION: There is no involvement of "contractors" in the processing of the PDB.

McConnell is a former director of the National Security Agency and the current director [now former] of defense programs at Booz Allen—one of the nation’s biggest defense and intelligence contractors. Under his watch, Booz Allen has been deeply involved in some of the most controversial counterterrorism programs run by the Bush administration, including the infamous Total Information Awareness data-mining scheme. McConnell has also been a leading figure in outsourcing U.S. intelligence operations to private industry.

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